By Lauren Hunt, Moneta Advisor
With year-end quickly approaching, taxpayers still have a few months left to plan ahead with strategies that could provide meaningful tax savings.
- Increase your 401(k) contributions
For the 2021 tax year, the maximum contribution to a 401(k) retirement plan is $19,500 for individuals under age 50. People ages 50 and above can make a “catch-up” contribution of an extra $6,500, for a total of $26,000. By making voluntary contributions to a Traditional 401(k) plan, you’re reducing your taxable income; so, the more you contribute, the more you lower your tax bill. Consider increasing your contribution elections during the month of December and review your elections again in January to spread out your contributions throughout the next year.
- Charitable Contributions
If you contribute to a qualified charitable organization, you generally can claim your contribution as an itemized deduction on Schedule A. You can also donate appreciated securities in lieu of a cash donation. In 2021, as part of the Consolidated Appropriations Act, $300 of charitable cash contributions made to qualifying organizations are allowed as a deduction from adjusted gross income for taxpayers that claim the standard deduction ($600 if married filing jointly). Just be sure to make your charitable contributions by December 31 as there’s no grace period if you make them after year-end.
- Tax-Loss Harvesting
When the price of stocks and mutual funds in a taxable brokerage account declines below their cost basis, you can sell them before the end of the year to capture the loss and, at the same time, exchange them into a similar investment to maintain market participation. By doing this, you capture those losses on paper so they are reported on your tax return. To the extent realized losses exceed realized gains, net realized losses can offset up to $3,000 of ordinary income with any remainder resulting in a loss carryforward to be used in future years.
- Convert IRA savings to a Roth IRA
Depending on your income, it could be wise to convert money into a Roth IRA. While you must pay ordinary income taxes today on dollars converted, monies inside a Roth IRA benefit from income tax-free accumulation indefinitely. In general, the more time you have to allow for the funds to compound income tax-free within the Roth IRA, the more compelling a Roth IRA conversion becomes.
- Start Organizing
Employers and other entities must send copies of 1099s and W-2s to recipients by January 31. Start gathering your current tax year’s tax payments and any documentation you have for tax credits and deductions. If you start gathering your tax-related documents now, you’ll set yourself up for a stress-free tax day.
We recommend consulting with an appropriately credentialed professional before making any financial or tax-planning related decision.
© 2021 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.
